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Unlike many areas of international cooperation, international financial regulation (IFR) relies on informal networks of regulators and “soft law” standards. The conventional wisdom is that this system provides effective cooperation while preserving the benefits of speed, flexibility and expertise in regulating global financial markets. In light of the crisis, however, skepticism has grown, with some commentators calling for a formal international organization to regulate finance. An elementary difficulty in this debate is the lack of a convincing account of the objectives of IFR. Why is unilateral regulation by states suboptimal, what are the potential gains from cooperation, and are those gains in fact achieved?

This article identifies five such objectives. The current system has been largely successful at two of them: facilitating basic cross-border supervision and enforcement assistance among regulators, and removing barriers to international finance by harmonizing some national rules. In three important areas, however, IFR has performed poorly. First, it has encountered numerous setbacks in its attempts to raise regulatory standards in states where powerful domestic constituencies resist reforms. Second, it has struggled to secure durable collective action among major jurisdictions to raise prudential standards, like capital adequacy rules. Finally, it has failed to create credible mechanisms to address situations where unilateral action is counterproductive, like cross-border bank resolution.

Given such limited success, why do soft law and networks dominate IFR? This article argues that the current system is not a product of efficient design but of historical path dependence and political economy. The postwar monetary system contemplated strict limitations on capital mobility and no need for regulation of international finance. After it collapsed, national regulators had to face financial globalization with the limited tools at their disposal. In turn, the growth of informal IFR empowered political actors — the regulators themselves, financial firms, and great powers — whose interests now largely determine outcomes across areas of IFR. Despite some post-crisis reforms, this pattern persists and raises doubt that IFR can effectively address the challenges of systemic risk and moral hazard.